Shares of First Republic Bank dropped about 15% in the extended session Tuesday after news that the troubled bank reportedly has hired advisers to review its options and manage the crisis.
First Republic FRC, +29.47%
stock rallied 30% in the regular trading day Tuesday, buoyed by reports that JPMorgan Chase & Co. JPM, +2.68%
was working to help bolster the bank’s capital.
The Wall Street Journal reported late Tuesday that First Republic had tapped Lazard to help it review its options, and consultant McKinsey for post-crisis planning, citing people familiar with the matter. Options on the table include a sale, a capital infusion and asset sales, the sources said, according to the Journal.
Separately, Reuters reported Tuesday that the bank could downsize if a capital raise fails, and Bloomberg reported First Republic may rely on government backing to facilitate a deal to shore it up.
“Our commitment to client service is unchanged, and we remain well-positioned to continue to manage deposit activity,” the statement reads. “Today, as every day, we are processing transactions, opening accounts, funding loans, answering questions, and serving clients’ overall banking and wealth management needs.”
First Republic stock has swung wildly in recent days, ending Monday’s session at a record low, and several trade halts plagued it during the day.
Image taken with a drone) A Tesla collision center is seen in this aerial view in Orlando.
Paul Hennessy | Lightrocket | Getty Images
Check out the companies making headlines in midday trading Tuesday.
Tesla — Shares popped 5% after Moody’s upgraded Tesla to Baa3 rating from its junk-rated credit. Moody’s called the electric-vehicle maker the “foremost manufacturers of battery electric vehicles” and said the upgrade reflects Tesla’s prudent financial policy and management’s operational track record.
JPMorgan, Bank of America — Shares of larger U.S. banks rose on Tuesday as investors showed increased optimism after Yellen’s remarks. JPMorgan gained about 3% and Bank of America rose by 3.5%.
Foot Locker — Foot Locker gained 6% after Citi upgraded the retail stock to a buy from neutral after its investor day on Monday. The firm said the company’s move away from malls and toward digital, kids and loyalty projects is a step in the right direction.
UBS — U.S.-listed shares of the Swiss-based bank gained 12% during midday trading following its agreement over the weekend to buy Credit Suisse for $3.2 billion. Credit Suisse rose 5% after taking a nearly 53% plunge on Monday.
Roblox — Shares rose more than 3% after D.A. Davidson said the online game platform has an “underappreciated” opportunity in artificial intelligence.
Emerson Electric — Shares added nearly 2% after Morgan Stanley said shares of the multinational tech company are too attractive to ignore. The firm upgraded the stock to overweight from equal weight.
Exxon Mobil — The oil and gas giant’s stock price gained 3% after Morgan Stanley said it likes the company’s robust “competitive positioning.”
— CNBC’s Alex Harring, Jesse Pound, Tanaya Macheel and Michelle Fox Theobald contributed reporting.
Shares of First Republic Bank FRC, +42.71%
rocketed 43.7% on heavy volume, putting them on track for a record one-day gain, as Treasury Secretary Janet Yellen said the U.S. government was committed to keeping the banking system safe, and amid reports JPMorgan Chase & Co. JPM, +2.95%
was working to help the bank. The previous record rally was 27.0% on March 14, 2023. Trading volume ballooned to 87.8 million shares, already nearly triple the full-day average, and enough to make stock the the most actively traded on major U.S. exchanges. Meanwhile, the stock’s price gain of $5.33 means it has only recovered about 49% of Monday’s $10.85, or 47.1% selloff, that took the stock to a record-low close of $12.18. The stock has plummeted 85.6% year to date, while the SPDR S&P Regional Banking exchange-traded fund KRE, +5.48%
has tumbled 22.2% and the S&P 500 SPX, +0.73%
has gained 3.7%.
Treasury Secretary Janet Yellen will tell America’s top banking lobby Tuesday that the government has a playbook if other financial institutions, like Silicon Valley Bank, collapse and pose a risk to banking sector.
In a speech to the American Bankers Association, Yellen discusses the government’s emergency rescue of SVB and Signature Bank‘s depositors — and says similar action could be taken in the event of a bank run.
“The steps we took were not focused on aiding specific banks or classes of banks,” Yellen said. “Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
Her comments are likely to reassure depositors and Wall Street investors and come as the government and the nation’s top bankers rush to contain the worst banking crisis in 15 years.
The collapse of Silicon Valley Bank sent a shockwave across the global financial system earlier this month. And fears about the stability of midsize U.S. banks have shaken the banking sector.
General view of First Republic Bank in Century City on March 17, 2023 in Century City, California.
AaronP/Bauer-Griffin | GC Images | Getty Images
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UBS’ planned takeover of Credit Suisse calmed the market slightly. Broader market conditions, however, still look unstable.
U.S. markets staged a relief rally as all major indexes made minor gains Monday. Asia-Pacific markets rose on Tuesday too. South Korea’s Kospi added 0.42% as the country’s producer price index for February increased 4.8% year on year, a slight decline from the previous month.
Japan’s Prime Minister Fumio Kishida is on his way to Ukraine for a surprise visit to Ukraine’s President Volodymyr Zelenskyy, Japan’s Ministry of Foreign Affairs confirmed. Kishida’s unexpected trip overlaps with Chinese leader Xi Jinping’s official state visit to Ukraine’s nemesis, Russia and its leader Vladimir Putin.
The “Minsky moment,” named after the economist Hyman Minsky, is a sudden collapse of the market after a long period of aggressive speculation brought on by easy money. Markets might face a Minsky moment soon, warned Marko Kolanovic, JPMorgan Chase’s chief market strategist and co-head of global research.
Markets haven’t collapsed. Some bank stocks are in the doldrums, yes, but the SPDR S&P Regional Banking ETF, a fund of regional bank stocks, rose 1.11% on Monday. Major indexes were up yesterday too. The Dow Jones Industrial Average gained 1.2%, the S&P 500 added 0.89% and the Nasdaq Composite increased 0.39%.
But there are signs market instability is increasing. The banking crisis is causing regional banks — which account for around a third of all lending in the United States — to reduce their loans, said Eric Diton, president and managing director of The Wealth Alliance. In other words, the availability of money in the economy is slowing even without the Federal Reserve increasing interest rates.
Speaking of interest rates, analysts seem to think there’s no good path forward for the Fed. An interest rate hike “would be a mistake,” MKM Partners Chief Economist Michael Darda told CNBC. On the other hand, a pause would cause “panicked reactions by equity and bond investors,” according to Nationwide’s Mark Hackett. This suggests markets are already so jittery that whatever the Fed does — even if it’s nothing — it might cause instability to spread.
With that in mind, investors might want to heed Kolanovic’s warning that a Minsky moment could be on the horizon.
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These Stocks Are Moving the Most Today: Credit Suisse, UBS, First Republic, and More
Stock futures were tumbling Monday after the UBS agreement to acquire Credit Suisse and moves by central banks to improve dollar liquidity failed to lift investors’ confidence in the global banking system.
A First Republic Bank branch is pictured in Midtown Manhattan in New York City, March 13, 2023.
Mike Segar | Reuters
First Republic Bank saw its credit ratings downgraded deeper into junk status by S&P Global, which said the lender’s recent $30 billion deposit infusion from 11 big banks may not solve its liquidity problems.
S&P cut First Republic’s credit rating three notches to “B-plus” from “BB-plus,” and warned that another downgrade is possible. Other ratings were also lowered.
The agency said First Republic likely faced “high liquidity stress with substantial outflows” last week, reflecting its need for more deposits, increased borrowings from the Federal Reserve, and the suspension of its common stock dividend.
It said that while the deposit infusion should ease near-term liquidity pressures, it “may not solve the substantial business, liquidity, funding, and profitability challenges that we believe the bank is now likely facing.”
Sunday’s downgrade by S&P was the second in four days for First Republic, which previously held an “A-minus” credit rating.
It could add to market concerns about the San Francisco-based bank, which has scrambled to assure investors and depositors about its health following this month’s collapses of Silicon Valley Bank, which also served many wealthy clients, and Signature Bank.
Another rating agency, Moody’s Investors Service, downgraded First Republic to junk status on Friday.
In a statement following the S&P downgrade, First Republic said the new deposits and cash on hand leave it “well positioned to manage short-term deposit activity. This support reflects confidence in First Republic and its ability to continue to provide unwavering exceptional service to its clients and communities.”
First Republic shares plunged 32.8% on Friday to $23.03, reflecting concern that more trouble lies ahead.
The shares have fallen 80% since March 8, when Silicon Valley Bank’s parent SVB Financial Group shocked investors by revealing big investment losses and a need for new capital, sparking a bank run.
Red pedestrian crossing signs outside a Credit Suisse Group AG bank branch in Basel, Switzerland, on Tuesday, Oct. 25, 2022.
Stefan Wermuth | Bloomberg | Getty Images
Talks over rescuing Credit Suisse rolled into Sunday as UBS sought $6 billion from the Swiss government to cover costs if it were to buy its struggling rival, a person with knowledge of the talks said.
Authorities are scrambling to resolve a crisis of confidence in the 167-year-old Credit Suisse, the mostly globally significant bank caught in the turmoil spurred by the collapse of U.S. lenders Silicon Valley Bank and Signature Bank over the past week.
The guarantees UBS is seeking would cover the cost of winding down parts of Credit Suisse and potential litigation charges, two people told Reuters.
Credit Suisse, UBS and the Swiss government declined to comment.
The frenzied weekend negotiations follow a brutal week for banking stocks and efforts in Europe and the U.S. to shore up the sector. U.S. President Joe Biden’s administration moved to backstop consumer deposits while the Swiss central bank lent billions to Credit Suisse to stabilise its shaky balance sheet.
UBS was under pressure from the Swiss authorities to take over its local rival to get the crisis under control, two people with knowledge of the matter said. The plan could see Credit Suisse’s Swiss business spun off.
Switzerland is preparing to use emergency measures to fast-track the deal, the Financial Times reported, citing two people familiar with the situation.
U.S. authorities are involved, working with their Swiss counterparts to help broker a deal, Bloomberg News reported, also citing those familiar with the matter.
Berkshire Hathaway‘s Warren Buffett has held discussions with senior Biden administration officials about the banking crisis, a source told Reuters.
The White House and U.S. Treasury declined to comment.
British finance minister Jeremy Hunt and Bank of England Governor Andrew Bailey are also in regular contact this weekend over the fate of Credit Suisse, a source familiar with the matter said. Spokespeople for the British Treasury and the Bank of England’s Prudential Regulation Authority, which oversees lenders, declined to comment.
Credit Suisse shares lost a quarter of their value in the last week. The bank was forced to tap $54 billion in central bank funding as it tries to recover from a string of scandals that have undermined the confidence of investors and clients.
It ranks among the world’s largest wealth managers and is considered one of 30 global systemically important banks – the failure of any would ripple throughout the entire financial system.
There were multiple reports of interest for Credit Suisse from other rivals. Bloomberg reported that Deutsche Bank was considering buying some of its assets, while U.S. financial giant BlackRock denied a report that it was participating in a rival bid for the bank.
The failure of California-based Silicon Valley Bank brought into focus how a relentless campaign of interest rate hikes by the U.S. Federal Reserve and other central banks – including the European Central Bank on Thursday – was pressuring the banking sector.
SVB and Signature’s collapses are largest bank failures in U.S. history behind the demise of Washington Mutual during the global financial crisis in 2008.
First Citizens BancShares is evaluating an offer for SVB and at least one other suitor is seriously considering an offer, Bloomberg News reported on Saturday.
Banking stocks globally have been battered since SVB collapsed, with the S&P Banks index falling 22%, its largest two-week loss since the pandemic shook markets in March 2020.
Big U.S. banks threw a $30 billion lifeline to smaller lender First Republic. U.S. banks have sought a record $153 billion in emergency liquidity from the Federal Reserve in recent days.
The Mid-Size Bank Coalition of America asked regulators to extend federal insurance to all deposits for the next two years, Bloomberg News reported on Saturday, citing a letter from the coalition.
In Washington, focus has turned to greater oversight to ensure that banks and their executives are held accountable.
Biden called on Congress to give regulators greater power over the sector, including imposing higher fines, clawing back funds and barring officials from failed banks.
The swift and dramatic events may mean big banks get bigger, smaller banks may strain to keep up and more regional lenders may shut.
“People are actually moving their money around, all these banks are going to look fundamentally different in three months, six months,” said Keith Noreika, vice president of Patomak Global Partners and a Republican former U.S. comptroller of the currency.
UBS is asking the Swiss government to cover about $6 billion in costs if it were to buy Credit Suisse, a person with knowledge of the talks said, as the two sides raced to hammer together a deal to restore confidence in the ailing Swiss bank.
The 167-year-old Credit Suisse is the biggest name ensnared in the turmoil unleashed by the collapse of U.S. lenders Silicon Valley Bank and Signature Bank over the past week, spurring a rout in banking stocks and prompting authorities to rush out extraordinary measures to keep banks afloat.
The $6 billion in government guarantees UBS is seeking would cover the cost of winding down parts of Credit Suisse and potential litigation charges, two people told Reuters.
One of the sources cautioned that the talks to resolve the crisis of confidence in Credit Suisse are encountering significant obstacles, and 10,000 jobs may have to be cut if the two banks combine.
Swiss regulators are racing to present a solution for Credit Suisse before markets reopen on Monday, but the complexities of combining two behemoths raises the prospect that talks will last well into Sunday, said the person, who asked to remain anonymous because of the sensitivity of the situation.
Credit Suisse, UBS and the Swiss government declined to comment.
The frenzied weekend negotiations come after a brutal week for banking stocks and efforts in Europe and the U.S. to shore up the sector. U.S. President Joe Biden’s administration moved to backstop consumer deposits while the Swiss central bank lent billions to Credit Suisse to stabilize its shaky balance sheet.
UBS was under pressure from the Swiss authorities to carry out a takeover of its local rival to get the crisis under control, two people with knowledge of the matter said. The plan could see Credit Suisse’s Swiss business spun off.
Switzerland is preparing to use emergency measures to fast-track the deal, the Financial Times reported, citing two people familiar with the situation.
U.S. authorities are involved, working with their Swiss counterparts to help broker a deal, Bloomberg News reported, also citing those familiar with the matter.
British finance minister Jeremy Hunt and Bank of England Governor Andrew Bailey are also in regular contact this weekend over the fate of Credit Suisse, a source familiar with the matter said. Spokespeople for the British Treasury and the Bank of England’s Prudential Regulation Authority, which oversees lenders, declined to comment.
Credit Suisse shares lost a quarter of their value in the last week. It was forced to tap $54 billion in central bank funding as it tries to recover from a string of scandals that have undermined the confidence of investors and clients.
The company ranks among the world’s largest wealth managers and is considered one of 30 global systemically important banks whose failure would ripple throughout the entire financial system.
The banking sector’s fundamentals are stronger and the global systemic linkages are weaker than during the 2008 global financial crisis, Goldman analyst Lotfi Karoui wrote in a late Friday note to clients. That limits the risk of a “potential vicious circle of counterparty credit losses,” Karoui said.
“However, a more forceful policy response is likely needed to bring some stability,” Karoui said. The bank said the lack of clarity on Credit Suisse’s future will pressure the broader European banking sector.
A senior official at China’s central bank said on Saturday that high interest rates in the major developed economies could continue to cause problems for the financial system.
There were multiple reports of interest for Credit Suisse from other rivals. Bloomberg reported that Deutsche Bank was looking at the possibility of buying some of its assets, while U.S. financial giant BlackRockdenied a report that it was participating in a rival bid for the bank.
The failure of California-based Silicon Valley Bank brought into focus how a relentless campaign of interest rate hikes by the U.S. Federal Reserve and other central banks — including the European Central Bank this week — was pressuring the banking sector. SVB and Signature’s collapses are the second- and third-largest bank failures in U.S. history behind the demise of Washington Mutual during the global financial crisis in 2008.
Banking stocks globally have been battered since SVB collapsed, with the S&P Banks index falling 22%, its largest two weeks of losses since the pandemic shook markets in March 2020.
Big U.S. banks threw a $30 billion lifeline to smaller lender First Republic, and U.S. banks altogether have sought a record $153 billion in emergency liquidity from the Federal Reserve in recent days.
In Washington, focus has turned to greater oversight to ensure that banks and their executives are held accountable.
Biden called on Congress to give regulators greater power over the sector, including imposing higher fines, clawing back funds and barring officials from failed banks.
Moody’s Investors Service downgraded its credit rating on First Republic Bank to junk late Friday, citing a “deterioration in the bank’s financial profile.”
The downgrade reflects “the deterioration in the bank’s financial profile and the significant challenges First Republic Bank faces over the medium term in light of its increased reliance on short-term and higher cost wholesale funding due to deposit outflows,” Moody’s analysts said in a release.
They cited various recent developments with First Republic, including the company’s Thursday disclosure that over the previous week its Federal Reserve borrowings ranged from $20 billion to $109 billion. Also Thursday, the bank received a $30 billion deposit infusion from 11 major U.S. banks.
“Moody’s believes the high cost of these borrowings, combined with the high proportion of fixed rate assets at the bank, is likely to have a large negative impact on First Republic’s core profitability in coming quarters,” the analysts said. “In addition, the rating agency noted that while the news of the banking consortium’s deposits is positive in the short-run, the longer-run path for the bank back to sustained profitability remains uncertain.”
First Republic is reportedly looking to raise money from other banks or private-equity firms by selling additional shares, according to the New York Times.
Shares of the company have plunged 80% from the close of trading on March 8, just before Silicon Valley Bank spooked investors with an update on its business and a planned stock sale. First Republic lost 33% in Friday’s session despite the deposit arrangement with the large banks. Shares were down another 6% in the extended session Friday.
Moody’s said its outlook was maintained at “rating under review.” That review for downgrade, it said, “reflects the continuing challenges to the bank’s medium-term credit profile in light of its significantly eroded deposit base, increased reliance on short-term wholesale funding and sizeable volume of unrealized losses on its investment securities.”
People are seen inside the First Republic Bank branch in Midtown Manhattan in New York City, New York, U.S., March 13, 2023. REUTERS/Mike Segar
Mike Segar | Reuters
Shares of First Republic were under severe pressure Friday despite the beaten-down regional bank receiving aid from other financial institutions the day before.
Those losses came even after 11 other banks pledged to deposit $30 billion in First Republic as a vote of confidence in the company.
“This action by America’s largest banks reflects their confidence in First Republic and in banks of all sizes, and it demonstrates their overall commitment to helping banks serve their customers and communities,” the group, which included Goldman Sachs, Morgan Stanley and Citigroup, said in a statement.
First Republic Bank continued to crater on Friday.
There were concerns that Thursday’s deposit infusion may still not be enough to shore up First Republic in the future.
Atlantic Equities downgraded First Republic to neutral, noting the bank may need an additional $5 billion in capital.
“Management is exploring different strategic options which may include a full sale or divestments of parts of the loan portfolio. The limited information provided implies that the balance sheet has increased substantially, which may well necessitate a capital raise,” analyst John Heagerty wrote.
“A distressed M&A sale could result in minimal, if any, residual value to common equity holders owing to FRC’s significant negative tangible book value after taking into account fair value marks on its loans and securities.”
Late Friday, after the stock market closed, the New York Times reported that First Republic was in talks to raise capital by selling shares to other unnamed banks or private equity firms in a private sale. Terms of the deal, as to the price of the shares, how many and to whom, were still under discussion, and it was also possible that the entire bank might be sold, the Times said.
— CNBC’s Michael Bloom and Scott Schnipper contributed to this report.
Wally Adeyemo at CNBC’s Delivering Alpha, Sept. 28, 2022.
Scott Mlyn | CNBC
WASHINGTON — The record-setting number of emergency loans that were made to banks this week by the Federal Reserve was key to stabilizing withdrawals from small and mid-sized U.S. banks, Treasury Deputy Secretary Wally Adeyemo told CNBC Friday.
The impact of the swift actions by federal regulators last weekend to stabilize the U.S. banking system helped contain the fallout but were still rippling through the economy almost a week later.
The markets still haven’t fully priced in the federal aid or the $30 billion 11 banks deposited into First Republic Bank to help boost confidence into the system, he said.
“It will take time for markets to catch up with the actions that have been taken by us and by these banks,” Adeyemo said on CNBC’s “Squawk on the Street.” “And what we’ve done now is given these institutions time to think through how they organize their businesses going forward.”
Following the collapse of California-based Silicon Valley Bank and New York-based Signature bank last Friday and Sunday, respectively, regulators announced a series of emergency measures to stabilize the nation’s banking system.
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They included guaranteeing the deposits of customers at the two failed banks; creating a new fund, the Bank Term Funding Program, to make short-term loans to banks on generous terms; and easing conditions at the Fed’s traditional overnight bank lending arm, the so called “discount window.”
The result of the actions was a dramatic turnaround in the fortunes of numerous banks, said Adeyemo. That included banks that had anticipated potential mass withdrawals, and pledged collateral ahead of time expecting to need emergency loans.
“While a number of banks coming into the weekend prepositioned the need to get more liquidity, what we found over the course of the week is that they have had to use less and less of it,” said Adeyemo. “And now that we’ve seen a stabilization in terms of deposits to those institutions.”
But while the trends were moving in the right direction, the amount of money banks borrowed in the past week through Wednesday from the Fed’s discount window set a new record at $153 billion, according to the Fed’s weekly report.
The previous record for discount window loans was $111 billion, set at the height of the financial crisis in 2008.
The identities of the banks that borrowed will not be made public for another two years. But the sum suggests the banking sector is not quite stable yet.
The ongoing questions about bank stability dovetail with another question arising out of the Fed actions. Whether uninsured deposits at banks that fail in the future will be covered the same way they were at SVB and Signature.
“Are all uninsured depositors in the U.S. banking system protected right now?” CNBC’s Sara Eisen asked Adeyemo.
The answer was that, for now, this is a Biden administration goal, but not a reality.
“Ultimately, the president has made clear our goal is to protect depositors to make sure that they have the money they need to run their businesses, and make sure their families are taken care of,” said Adeyemo.
According to the report, the Swiss National Bank and Finma, its regulator, are behind the negotiations, which are aimed at boosting confidence in the Swiss banking sector.
Earlier this week, the embattled Credit Suisse said it would borrow as much as 50 billion Swiss francs (or nearly $54 billion) from the Swiss National Bank. But even with that move, Credit Suisse shares have continued to fall. Credit Suisse shares closed lower by nearly 7% on Friday, but are down 24% for the week.
Swiss regulators have told U.S. and U.K. regulators that a merger of the two banks was their “plan A,” the people told the Financial Times. But there continue to be other options that may be considered, they said.
The paper said UBS declined to comment. Credit Suisse also declined to comment.
UBS reported fourth quarter and full-year earnings.
First Republic’s losses were particularly unnerving as they came after 11 other banks pledged to deposit $30 billion at the bank for at least 120 days. That rescue was an attempt by the largest U.S. banks to shore up confidence in the financial sector.
On Wednesday, Swiss National Bank said it would provide Credit Suisse with additional liquidity and the Swiss Financial Market Supervisory Authority issued a statement saying the bank met “capital and liquidity requirements.” However, the unease in the banking sector is continuing.
The pressure to combine UBS and Credit Suisse recalls the 2008 financial crisis when Bear Stearns was sold to JPMorgan in a fire-sale deal. Despite the seemingly low price of that transaction, JPMorgan’s Jamie Dimon has said he regretted the decision. That lesson is likely being weighed by UBS executives and its board as part of the reported negotiations.
Financial stocks continued to drag stock stock market down Friday, as the Dow Jones Industrial Average’s DJIA, -1.19%
four financial components contributed about 40% of the index’s selloff. Shares of JPMorgan Chase & Co. JPM, -3.78%
gave up 3.7%, insurer Travelers Companies Inc. TRV, -4.17%
dropped 3.6%, American Express Co. AXP, -2.62%
fell 3.2% and Goldman Sachs Group Inc. GS, -3.67%
slid 3.0%. The combined price declines of those stocks reduced the Dow’s price by 170 points, while the Dow fell 439 points, or 1.4%. SVB Financial Group’s SIVB, -60.41% bankruptcy filing on Friday showed that the $30 billion infusion into First Republic Bank FRC, -32.80%
didn’t mean the crisis in investor confidence was over.
A potential takeover over First Republic could spell trouble for the bank’s shareholders, according to Wedbush Securities. Analyst David Chiaverini downgraded the bank stock to neutral from outperform, saying that a potential sale would require a marking of its loans and securities to fair value, and wipe out equity value for shareholders. FRC YTD mountain First Republic shares have tumbled 72% in 2023 He said that “a distressed M & A sale could result in minimal, if any, residual value to common equity holders owing to FRC’s significant negative tangible book value after taking into account fair value marks on its loans and securities.” The downgrade from the firm comes after a consortium of major players agreed Thursday to deposit $30 billion into First Republic in an effort to rescue the bank after its more than 72% tumble this month amid the failure of Silicon Valley Bank . Shares dropped about 14% before the bell. Given this backdrop, Chiaverini slashed his price target to $5 a share from $140, representing more than 85% downside from Thursday’s close. This base case calls for an 85% probability that the bank’s acquired for close to $0 a share and 15% chance that shares would be valued at 10 times price to earnings based on 2024 earnings. Chiaverini views a sale of the bank as beneficial to the broader banking sector, and the “best the option to avoid receivership.” However, marking the company’s tangible book value to fair value as of Dec. 31 implies negative $73 a share and symbolizes a $13.5 billion capital pit for any buyer. “While the company has an exceptionally strong reputation and franchise value as evidenced by its high NPS, we are doubtful that the valuation accorded to these factors would be enough to cover the tangible book value shortfall on a FV basis,” he said. — CNBC’s Michael Bloom contributed reporting
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The banking crisis seems contained for now … again.
The European Central Bank hiked interest rates by 50 basis points, or half a percentage point, to 3%. The move comes after — and despite — yesterday’s turmoil in Europe’s banking sector, caused by a sell-off in Credit Suisse. Hence, alongside its rate hike, the ECB said it would be ready to support banks if needed.
Smaller banks might be left out of efforts to protect the banking system. U.S. Treasury Secretary Janet Yellen said only banks that “would create systemic risk and significant economic and financial consequences” would have their uninsured deposits protected.
PRO Markets expect the Federal Reserve to raise interest rates by a quarter percentage point next week. But there’s a chance the central bank might pause hikes.
At the risk of jinxing the situation, the banking crisis, which has now spread from the U.S. to Europe, appears contained (again).
That’s thanks to the extraordinary number of measures that financial regulators and central banks on both sides of the Atlantic have used to shore up confidence. And those are not just empty promises. For instance, four days after the Fed introduced the Bank Term Funding Program — which lends banks money for a year in exchange for high-quality collateral — financial institutions have already borrowed $11.9 billion from the program. Whether that number exposes material weakness in banks’ balance sheets is not really the point. The important thing is consumers and investors are psychologically reassured.
Wall Street was cheered by the rapid response to the banking crisis. The Dow Jones Industrial Average rose 1.17%, the S&P 500 increased 1.76% and the Nasdaq surprised by jumping 2.48% — technology stocks had a very good Thursday. Alphabet rallied 4.38%, Amazon added 3.99% and Microsoft rose 4.05%. Microsoft rallied after the company announced it would be adding artificial intelligence features, named Copilot, to apps like Word, Powerpoint and Excel. But the other tech giants probably rose because investors were betting — now that there’s evidence that something’s breaking in the economy — that the Fed might not be as aggressive in hiking rates. That would benefit tech firms the most.
It would also benefit the overall economy, which according to Goldman Sachs has a 35% chance of entering a recession in the coming 12 months — up from 25% before the banking crisis happened. The Fed’s two mandates, to stabilize the economy and to fight inflation, are looking increasingly at odds with each other. It won’t be an easy job.
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Traders gather at the post where First Republic Bank as the stock is halted from being traded on the floor of the New York Stock Exchange (NYSE) in New York City, March 15, 2023.
The collapse of Silicon Valley Bank last Friday has left investors scrambling to identify other regional banks that have similar balance sheet issues, namely a high rate of uninsured deposits and bonds or loans with a long time to maturity.
First Republic had the third-highest rate of uninsured deposits among U.S. banks, behind SVB and Signature Bank, which was closed by regulators over the weekend, according to a note from Raymond James. First Republic’s stock was down nearly 75% in March as of Wednesday’s close, and the bank’s debt has been downgraded by S&P Global Ratings and Fitch Ratings.
The plan announced on Wednesday called for $30 billion in deposits from major banks, including JPMorgan Chase and Bank of America, as a show of confidence in the regional banking system.
First Republic’s stock has been under pressure since the collapse of SVB.
The struggles for regional bank stocks early this week came despite the announcement from U.S. regulators over the weekend of additional support. That included a new program from the Federal Reserve that allowed banks to swap some assets for cash without having to realize the mark-to-market losses caused by higher interest rates.
First Republic said Sunday it had more than $70 billion in liquidity, not counting any additional support from the new Fed program.
In addition to the fears of more bank failures, the potential for increased regulation and smaller deposit bases for midsized banks could also be hurting the stocks as investors assess the future earnings power of the regionals.
The banking system got another shock Wednesday, when Credit Suisse‘s Swiss-traded shares fell more than 20% amid concerns that the bank’s “material weakness” in its financial reporting could lead to it needing to raise more capital. However, the Swiss National Bank, the country’s central bank, struck a deal with Credit Suisse to allow it to borrow up to roughly $54 billion.
But while Credit Suisse’s struggles could have ripple effects throughout the global banking system, the Swiss bank’s problems appear to be unrelated to the U.S. regional banks.
